Ethical investing: Are US alternative-energy companies a good buy?

About a third of these firms are in the US, but some overseas prospects are too good to pass up, according to fund manager Carey Callaghan.

August 11, 2008

'If the United States takes a willful, smart approach to this, there is absolutely no reason we can't be energy independent.' – Carey Callaghan, American Trust Company

Ann Hermes

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Alternative energy is one of the hottest trends on Wall Street. But for America's ethical investors, it mostly means buying stock in foreign firms. Now, companies in the United States are making a bid to take a bigger piece of the market. Is it time to invest in US alternative-energy funds? The Monitor's Laurent Belsie recently talked about that possibility with Carey Callaghan, co-portfolio manager of American Trust's Energy Alternatives Fund. Here's an edited version of their conversation. Can America become a leader in alternative energy?

I think it can, but we've got some work to do. We look at a universe of 125 companies that are squarely focused on renewable energy globally. Of those, 41 are in the United States – or about a third. But if you look at the value of those companies, it's only about 25 percent.

The US has a number of advantages that will play out in the next few years…. We have one of the best wind corridors in the world in the area east of the Rockies from the Dakotas all the way down to Texas. It's very windy when you get up to 60, 80 meters, which is the height of modern-day wind turbines. Then from a solar perspective, we have the US Southwest, which has one of the best areas in terms of number of days of sunshine and solar intensity, coupled with geothermal [sources] on the coast. [Also] we have the leading position in semiconductors, which is a cousin to the photovoltaic market. We're a leader in power-generation technology…. We also have a leadership position in materials science.

If you look at many of the companies that are out there, they're from Germany, Japan, Spain. And there's a very good reason for that, because the costs of some of these technologies are not yet competitive with technologies such as burning coal. However, if you would give these industries a subsidy, as is done in the case of both wind and particularly solar in these other countries, it can flourish. So that's why the US has lagged. It's really a public-policy question. But both presidential candidates have endorsed green technologies, so I think that may change coming next year.

Are there certain companies that you like in solar?

In terms of US companies, there's a company called SunPower. It trades on the NASDAQ. The ticker is SPWR…. A couple things about SunPower. It does have a leadership position in terms of efficiency. It has a 22 percent conversion rate from the power that's coming in in the form of solar photons that's translated into electricity.

What about in wind?

The wind players are primarily from Europe. And there are a number of those. In the US, General Electric is a player. We actually think there's an indirect way that's rather interesting, which is Owens Corning.

The insulation guys?

Think the "Pink Panther." But insulation is only about 40 percent of their business. They also have a roofing and tile business. Then they also have a composites business. Now this is fiberglass, which Owens Corning invented in the 1930s…. And about 10 percent of their fiberglass business goes toward wind turbines, which is remarkable. That can become a significant driver for the company over the next five to 10 years.

Any other US companies that strike you?

There's a player in geothermal called Ormat Technologies. It's kind of a half-American company. It's 60 percent owned by an Israeli holding company called Ormat Industries. Ormat Technologies trades on the New York Stock Exchange, ticker ORA. This is the leading geothermal company, primarily in places, as you might imagine, like California and Nevada. They are set to expand their capacity by two-thirds in the next two years. So it's a remarkable expansion in capacity. And they have a development pipeline beyond that.

Are there enough US companies out there that you could build a diversified portfolio in alternative energy?

No…. I think it's important to look at some of the other companies. And there are some excellent companies overseas that can be attractive…. In China, which I think is a good place to be from an energy perspective, SunTech trades on the New York Stock Exchange in ADR [American Depositary Receipt] format. The ticker is STP.

Is there another company you're interested in?

There's a Brazilian company [that] also trades on the New York Stock Exchange called Cosan. The ticker is CZZ. They are the largest ethanol producer in Brazil. Sugar-cane-produced ethanol, unlike the corn-based ethanol we produce in the US, has a much more favorable output to input ratio. So in the US with corn, we get about 1.3, 1.4 gallons of ethanol for every gallon of diesel, for instance, that's used in producing it. But in Brazil, that ratio is 8 to 1. So it's a much more favorable yield. And as a consequence, they have much lower costs.

Is there a measure out there that will tell us when the US becomes a major player in alternative energy?

I would look for energy independence. I think that's really what it's all about.

Is energy independence possible in our lifetimes?

Absolutely. If the United States takes a willful, smart approach to this, there is absolutely no reason we can't be energy independent.